Now that the fever at Silicon Valley Bank appears to have broken, a clearer picture is emerging. SVB, despite its more than $200 billion in deposits, was not a traditional retail bank. It only had around 27 bank branches scattered around NorCal, Texas, New York, Atlanta, Washington D.C. and in Boston, where it had acquired a private bank. Instead, it was at the center of a very unique financial ecosystem, based in Silicon Valley, and composed of tech bros, venture capital firms and their portfolio companies. It also acted more like an investment bank than a commercial bank, taking risks that much more conservatively run banks would never have assumed. (It actually owned an investment bank too, SVB Securities, that still specializes in underwriting and advising tech and healthcare companies.) But when your clientele is part of the FOMO, fast-money crowd, I guess you have to cater to them, or someone else will.
SVB went whole hog into servicing them. After the dot-com crash, in 2000, most banks would no longer loan against illiquid private shares in tech start-ups. Silicon Valley Bank did. Most banks wouldn’t make unsecured loans to start-ups that had no assets or positive cash flow. Silicon Valley Bank did. Most banks wouldn’t make super generous loans to founders, both for their own personal and professional uses. But Silicon Valley Bank did, as long as they agreed to keep their cash balances, or most of them, in their vaults. Silicon Valley Bank also gave venture capital firms very low interest-rate loans to allow the firms a way to juice their returns. “SVB would provide venture debt for companies that sometimes don’t have revenues or millions in revenue at a very good price,” Jai Das, co-founder of Sapphire Ventures, once said. “There was a lot of trust involved.”
The bank’s balance sheet expanded wildly, especially during the pandemic. According to the bank’s own financial presentation to investors, from January, SVB banked nearly half of U.S. venture-backed technology and life-sciences companies and 44 percent of recent public technology and health-care companies. Its creativity and flexible credit standards made it the bank of choice for founders and investors putting capital at risk in the innovation economy. In 2009, SVB’s on-balance sheet deposits totaled $9 billion, according to its January presentation. By the end of 2022, its on-balance sheet deposits had swelled to $186 billion, and to around $215 billion by the time it was taken over by the FDIC last Friday. “It was a one-way bet on tech mania,” one Wall Street executive told me. He did not mean it as a compliment. Or as Michael Cembalest, the guru-like chairman of markets and investing at JPMorgan Chase, put in a note to clients on Friday, SVB “carved out a distinct and riskier niche than other banks.”